Iconiq Capital is now an $89-billion RIA as it evolves from wealth management to KKR mode -- not without Henry Kravis and 'glaring conflicts'
The San Francisco firm nearly quadrupled in size since June 2020 sources and buys pre-IPO shares, is determined to be a wealth manager to the super-wealthy and compete for A-list PE deals with Blackstone and the like.
Brooke's Note: I have always wondered just how far the Wall Street breakaway movement could go. We know that the profit centers at the investment banks are related mostly to trading, financing and deal-making and the retail brokerage forces were almost an afterthought -- a means of distribution. What if those "distributing brokers" got organized and value-added enough to use the power of direct relationships with investors to build out financing machinery for the most lucrative deals. Iconiq Capital seems to prove it can be done -- dodging conflicts at every juncture -- but seemingly delivering extraordinary returns by using client expertise, capital and connections in a virtuous circle on their behalf.
Iconiq Capital grew from $23 billion in June of 2020 to more than $80 billion after a bunch companies had their IPOs and drove huge capital gains in client-owned pre-IPO shares.
Divesh Makan, the Morgan Stanley stockbroker for Facebook co-founder Mark Zuckerberg, co-founded the breakaway San Francisco RIA in 2011 and owned big stakes in 11 firms -- including Honest, Robinhood, Gitlab and Warby Parker. All had their initial public offerings last year. See: How the Facebook IPO is creating the mother of all RIAs, Iconiq, and what an in-your-face it is for Wall Street
Iconiq also scored big on M&A deals involving two companies, Wolt, a restaurant food delivery business, and Turbonomic, an application resource management firm.
It was a major early investor in both, which were acquired by Doordash and IBM, respectively.
"The reason Iconiq has gotten so big is that they are investing in the next big thing – Facebook (Meta) for example – before they ever go public.
"Those guys (Iconiq) truly “get it," says Lorenzo Esparza, founder and CEO of Manhattan West - a JPMorgan breakaway in Los Angeles seeking to build a major venture investing firm as part of an RIA wealth manager.
Yet being in so many lanes at once as manufacturer and distributor simply must bump off the the icebergs of conflict, says Eliza DePardo, founder and director of consulting at De Pardo Consulting.
"The conflict of interest issue is glaring," she says. "I don't think it matters how this issue is conveyed or couched, it's unavoidable."
Iconiq agrees, at least for disclosure purposes.
"Many of the investors in the ICONIQ Private Funds are our Managed Account Clients, and when we recommend that these clients invest in funds that we sponsor, we face actual and potential conflicts of interest," it writes on page three of this SEC document.
Such a set of conflicts in having product sponsorship and client fiduciary duty under one roof is mostly new for RIAs because the rise of the business model is "a recent phenomenon," according to DePardo.
Asked by Business Insider, how it would get past such conflicts, insiders said Iconiq's investing emphasis will dodge create conflicts of interest with its clients because the capital goes to medium-size tech companies that the clients’ firms won't pursue, according to people familiar with the firm -- leaving out concerns of conflict with the wealth manager.
"RIAs with the aspiration to shapeshift into private equity is a recent phenomenon," DePardo adds in an email.
"The question is, does the ability to serve the advice needs of clients through wealth management, financial planning or investment management capabilities create the foundation for a successful PE player?"
Covering the bases
"In the case of an RIA wanting to build a PE capability, does the firm have a specific sub-field of expertise that could be used as the springboard to create additional value? Success in PE is ultimately about value creation. Sourcing opportunities, structuring, signing, restructuring, scaling and selling are all essential core competencies," she says.
For certain, certain firms are more than capable of effectively deploying such a complex business model, Esparza says.
"That’s really what high-net-worth clients ought to be looking for [as opposed to a plain portfolio of stocks and bonds]," he adds.
"Why not be able to talk to someone in real estate who really knows the space that is employed by your RIA firm? Why not talk to a VC expert in late-stage private market VC who can get you access to big names before they go public?"
Becoming such a complex organization requires a staff large enough to cover all the bases.
Iconiq now has 293 employees, SEC docs show, up nearly six fold from 55 employees in 2015, when its managed assets stood at $12.5 billion.
"It may appear to be easy, because of the performance of the markets over the last decade, but it's really not," said Wally Okby, researcher at Aite Group told Business Insider when asked about the seeming ease of the Iconiq model. "The test of that will come when markets turn or when they vacillate a little. You need a certain skill set."
Iconiq's clientele consists of 257 high-net-worth investors with $11.5 billion of AUM and 45 charitable organizations with an additional $4.1 billion. The bulk of its client assets, $44.8 billion, are listed as "pooled" in 204 pools, says the most recent December ADV report.
All this RIA growth apparently comes without much of a tailwind from Zuckerberg's personal fortune, according to a paywalled article in Business Insider from last March.
The article says the 37-year-old Meta mogul has transitioned most of his assets to his wife's philanthropy, Chan Zuckerberg Initiative (CZI).
CZI's chief investment officer, David Lee, was hired from Princeton University Investment Company, the university's $38-billion endowment.
CZI's creation was announced in 2015 with the idea that 99% of Zuckerberg's Facebook wealth would live there with a philanthropic orientation, but it's not a foundation or other tax exempt entity, which gives it full leeway to make wideranging investments.
For example, it can invest in for-profit startups, can spend money on politics and lobbying and keep top executive compensation under wraps.
Not that it's insulated from markets; Zuckerberg lost $29 billion in a single day when Facebook shares were in a freefall.
Regardless of the whoosh of assets that went from Iconiq to CZI, the former's assets stood at $89 billion of AUM, including $66.5 billion discretionary and $12.5 billion non-discretionary, according to the Iconiq ADV2, dated Sept. 30.
The Iconiq website offers another version of its AUM at $83.5 billion. (See screen shot on right.)
"In terms of Iconiq, that should really be the gold standard for RIAs and the vision for RIA evolution.
"They saw the future, had the client base, and then skated to where the puck was going," says Esparza. See: Manhattan West makes 'inflection point' poach of Reggie Tucker as Los Angeles VC 'deal flow' reaches critical mass and the 2016 RIA startup hires madly to catch a once-in-a-generation opportunity
The company certainly has a history of golden elbows to rub.
KKR's Henry Kravis, TPG's David Bonderman and Tiger Global Management’s Chase Coleman (through his own foundation) are, or were, Iconiq clients. All three sat on the board with Twitter Founder Jack Dorsey and LinkedIn Founder Reid Hoffman, according to a 2017 WSJ article.
Doug Fritz, CEO and co-founder of F2 Strategy, says the Iconiq business model is unique enough that it self-describes.
"We refer to this as ‘being like Iconiq’ whenever it comes up," he says.
"In short, I see this as a likely trend (albeit limited) where groups of very wealthy individuals will find themselves in a position to benefit from being in the company of other very wealthy individuals. Iconiq seems to be maximizing on the wealth and entrepreneurial nature of their clients."